Sunday, October 25, 2015

Several years ago over lunch a medical researcher I know told me that industrial chemicals were disrupting the human endocrine system leading to widespread obesity and diabetes. He said his research had revealed an important cause--the decline in the production of testosterone in both men and women (yes, women produce a little testosterone) due to this disruption. When this deficiency was reversed, patients experienced significant improvement in both obesity and diabetes.

That's not all. He explained that most people believe that poor diet and little exercise are the central cause of obesity and diabetes. No doubt poor diet and exercise are important contributing factors. But when the body's signaling system fails to indicate when it has had enough to eat, it's hard for most people to recognize that they need to stop eating. How many of us know people who say that they are hungry all the time? A normal human being with a normal endocrine system should not feel "hungry all the time."

The link between what has become a sweeping twin epidemic and man-made chemicals is getting wider notice these days. But the link between endocrine disruption, obesity and diabetes is still absent from popular medical accounts such as those found on WebMD for obesity or on official sites such as that of the World Health Organization.

Endocrine disruption has also been linked to cancer, reproductive failure, neurological disorders and developmental problems in fetuses, problems that can lead to illness later in life. In fact, industrial chemicals known to disrupt endocrine function are found in humans and animals worldwide.

The subject of endocrine disruption first burst into the public mind with the publication of Our Stolen Future in 1996 by three scientific researchers. They sought to make the issue more accessible to the public in order to galvanize action.

A few companies have voluntarily eliminated a known disruptor from the linings of food cans and in plastic bottles and containers. But the disruptor, bisphenol A, commonly referred to as BPA, while banned from baby bottles, continues to be used widely.

And, therein lies a difficult regulatory problem. Since known endocrine-disrupting chemicals do their disrupting at extremely low concentrations, nothing short of a complete ban would likely keep them from affecting humans and animals.

What this means is the entire human and animal population of the planet is now involved in an uncontrolled experiment courtesy of the chemical industry. We are all exposed to a soup of man-made chemicals every day, some of them endocrine disruptors.

The industry says it is up to the public to prove somehow that these so-called disruptors are present and dangerous. How the public would build the expensive facilities and pay the high-level personnel needed for such a task is ignored. Government regulatory agencies and a few university laboratories have taken up some of this work.

But this puts the burden of proof in the wrong place. It should be the industry which proves that novel chemicals put into food or released into the environment are safe for humans and animals.

This approach is commonly known as the precautionary principle. It essentially places the burden on the company to prove a novel chemical is safe BEFORE it is introduced into society and the environment. The European regulatory authorities implemented such an approach in 2007 called REACH over the loud objections of the chemical industry. The authorities have put the industry on notice that chemicals of "very high concern" will either have to be shown to be safe or be phased out. (That REACH does not classify BPA as dangerous to adults shows that even cautious European regulators don't understand that very low doses can be damaging.)

The precautionary principle embodied in REACH is simple. If you are going to expose anyone in the public to a man-made substance without explicit consent, you need to prove that the substance is benign or of such great benefit to society that the risks associated with exposure are worth the danger. This is a very high bar to clear, and many toxic chemicals won't make the cut under the European rules.

Partly, this is because regulators granted a 10-year grace period during which chemical makers have had an opportunity to find less toxic or nontoxic substitutes. Without REACH, it is doubtful the industry would have bothered to do so.

So-called "green chemistry" is one response in an effort to find chemicals that minimize environmental and health impacts.

Meanwhile, the public health effects of endocrine disruption are growing, undermining the health and happiness of millions across the planet. And, the costs are mounting for the treatment of obesity, diabetes, cancer and a host of other health problems related to the great global chemical experiment in which we are all participants, whether we wish to be or not.

The chemical industry is risking nothing short of a rebellion by the public and governmental authorities if it continues to fight sensible precautionary regulation. Will the day come when there will be enough evidence to link obesity or diabetes or both more directly to chemical exposures? If that day comes, it will be the beginning of the end of impunity for the chemical industry as the legal establishment feasts on the toxic profits of the companies at the center of the epidemic.

The World Health Organization estimates that 9 percent of all adults over 18 have diabetes. I couldn't find global population figures for those 18 and older. But of those 25 and older, that must mean that approximately 372 million have diabetes worldwide. If the fight over diabetes becomes a legal battle similar to that experienced by tobacco companies, the plantiffs' lawyers will run out of chemical companies to sue long before they run out of clients.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Sunday, October 18, 2015

We all know Goldilocks from the story of Goldilocks and the Three Bears in which the young maiden wanders into the home of the bears and samples some porridge that happens to be sitting on the dinner table. The first bowl is too hot, the second is too cold and the third is just right.

Like a corporate version of Goldilocks, the oil industry has been wandering into the world marketplace in recent years often finding an oil price that is either too high such as in 2008 and therefore puts the brakes on economic growth undermining demand and ultimately crashing the price as it did in 2009. Or it finds the price too low as it is today therefore making it impossible to earn profits necessary for exploiting the high-cost oil that remains to be extracted from the Earth's crust. Oil that hovered around $100 per barrel from 2011 through much of 2014 seemed to be just right. But those prices are now long gone.

Violent swings in the price of oil in the last decade have made it difficult for the industry to plan long term to produce consistent supplies at moderate prices. This has important implications for future supplies which I will discuss later.

The great political power of the oil industry has led many to conclude erroneously that the industry must also somehow control the price of oil. If the industry has such power, it is doing a really lousy job of using it.

It is true that in times of robust demand, OPEC can maintain high prices by limiting oil production in member countries. But when demand softens, OPEC rarely exhibits the necessary discipline as a group to cut production. Typically, Saudi Arabia shoulders most of the burden of reduced production under such circumstances.

Which is why it was so shocking when, during this most recent swoon in the oil price, the desert kingdom responded with an emphatic "no." No, Saudi Arabia will not curtail its production. And, since all the other OPEC members are unable to challenge Saudi Arabia's power--which consists of the ability to add production to counter cuts by others--the price of oil has stayed low.

The stated reason for this move is that Saudi Arabia wants to undermine American tight oil production. And, low prices are doing just that. The U.S. oil rig count peaked in October last year at 1609. In the week just passed that number was 595.

The low-price strategy seems to be knocking the competition out of the game. And, it's difficult to imagine investors in the future dumping great gobs of new money so freely into tight oil wells and the companies that drill them after having been thoroughly burned this time around. And, that's probably true even if the price of oil recovers significantly. There will always be the fear that Saudi Arabia will flood the market with oil and crash the price. (This is not, in fact, what Saudi Arabia has done so far. In the most recent oil price rout, the Saudis simply refused to cut the kingdom's then current production level--as it had regularly done in the past--even as demand softened and prices fell.)

Probably one of the best illustrations of the problematic future of oil supply is the recent abandonment of a multi-billion dollar arctic oil drilling project by Shell Oil Company, the American arm of the European-based Royal Dutch Shell PLC. Shell called its arctic discoveries "marginal" and indicated that it would cease drilling there for the "foreseeable future."

This emphasizes that the remaining oil available for extraction is both difficult-to-get and high-cost. It turns out that the oil discovered by Shell's arctic project comes in small packages instead of the giant reservoirs which have powered the oil industry and modern civilization up to now.

What this implies is that limitations on future supplies may result from the price of oil being too low. Contrary to the public perception that such limits would be accompanied by high prices, it is precisely high prices that make it possible to exploit the marginal deposits that are unprofitable today.

Analyst Gail Tverberg has elaborated this thesis in considerable detail on her blog Our Finite World starting as far back as 2007. Similar ideas have also been advanced by energy analyst and consultant Steven Kopits. (A 2014 presentation by Kopits is available here.) Tverberg's analysis is that high energy prices, particularly high oil prices, tend to suppress economic growth leading to recession and price declines. The lower incomes and lack of employment that accompany recessions make oil--despite its lower price--less affordable than is generally recognized. Lack of demand is partly the result of crimped living standards--which keep prices low, which, in turn, make it unprofitable to exploit high-cost oil.

Now, oil demand actually went up somewhat in the face of recent lower prices. But if Tverberg's thesis is correct, then demand won't hold up when the economy sinks into a recession or stalls close to zero growth. If the world economy shrinks or merely stalls, as it now appears to be doing, we may be in for a long stagnation for other reasons as the world works off debt built up previously in a long 30-year credit boom.

It seems only logical that if world oil production drops as a result of low demand and low prices, at some point shortages will appear and prices will rise even if the world economy remains in a slump. That may happen, but the big question will be this: Just how high can those prices rise before financially strapped consumers can't afford to pay more?

If that price turns out to be somewhat less than $100 a barrel, very few deposits of unconventional oil such as arctic and deepwater oil, tight oil from deep shale deposits, and tar sands will be profitable to produce. And these unconventional sources have been virtually the only engines of oil production growth in recent years. The International Energy Agency, a consortium of 29 countries which tracks energy developments, is already on record saying that conventional oil production peaked in 2006.

With violent swings in oil prices continuing, it's hard to imagine world markets delivering an oil price indefinitely above $100--which would encourage growth in unconventional oil production--but not above, say, $130, which could easily send the economy into recession and lower prices below the point of profitability for unconventional oil. It seems that either Tverberg's stagnation scenario will limit production because of low prices or that a return to robust economic growth will be doomed to be short-lived because oil prices rise above what the world economy can bear.

It's always possible that some technological breakthrough will allow us to get out of this cycle. But we should not count on this soon. As I have pointed out, the most recently touted "new" technology, the technology that opened the deep shale deposits in the United States for oil drilling, has a 60-year history of development:

For truly revolutionary technology to make an important contribution to the world's oil supply over the next 20 years, that technology would have to be available today, but not yet widely deployed. The cycles of innovation in the oil industry do not move nearly as quickly as those in, say, the semiconductor industry. Major breakthroughs in oil extraction require long lead times, and there doesn't seem to be anything but marginal improvements in some existing techniques in prospect for many years to come.

For now, we may be experiencing limits in oil production that are not absolute, but relative to what the world economy can afford. Of course, we could rework our infrastructure and daily practices to use less oil or even to begin to phase it out altogether. But, don't look for that kind of dramatic move anytime soon, either.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Sunday, October 11, 2015

On Wall Street buying options--options on stocks, on commodities, on currencies, on almost anything--has been seen as a sucker's bet (unless you are doing it to hedge an existing investment).

For the uninitiated, options are the right to buy or to sell something--practically anything really--at a set price over an agreed period of time. I can call my broker and buy the right to purchase Yahoo at $35 a share between now and April 15 next year for $2.32 a share. I can also buy the right to sell Yahoo at $25 a share for $1 a share. I might do this if I owned the stock and wanted to protect my investment in case of a decline. With Yahoo trading at about $32 a share, neither option would make me any money right now. But either one could make me money, and possibly lots of it, if there were to be a major move in Yahoo either up or down between now and April 15. In essence, I would be buying volatility.

Yahoo dropping to $2 a share or zooming upward to $200 in the period before the options described above expire would surely destroy a significant chunk of the wealth of those who sold options to others that allow them to sell at $25 in the former case or to buy at $35 in the latter case.

But, it turns out that most stock and commodity options expire worthless. And so, those selling the options walk away with the premium paid by the buyer and then reinvest that money or spend it elsewhere. These option sellers (or "option writers" as they are often called) make a very handsome living during times of low volatility such as we have seen since the stock market bottomed in 2009.

But the true description of their situation comes from the world's most famous student of risk, Nassim Nicholas Taleb. He describes option sellers as people who are picking up nickels and dimes in front of a steamroller--and don't know it. They are selling options--sometimes for mere pennies--when they are risking dollars if they are wrong. Such events, they reason, are so rare that these events won't happen to them.

But they fail to understand that hidden risks in the world-at-large which affect the prices of financial instruments (and many other things in our lives as well) cannot be quantified or anticipated in a systematic manner. Taleb calls such hidden risks "black swans," defined as rare, unforeseen, but highly impactful events. When a black swan creates huge volatility in the financial markets, some option sellers can be wiped out. And, it turns out that such rare events are far less rare than standard financial models predict.

It stands to reason then that in a world of increasing instability such as the one that is now emerging--increasing geopolitical turmoil around the world (especially in the Middle East), increasing climate-related turmoil (for instance, last week's 1,000-year rain in South Carolina), and increasingly jumpy stock and commodity prices (especially oil)--that option sellers would be running for the hills.

But old habits die hard. Some options such as those on the S&P 500 Index are more expensive now than they were in July before all the volatility. But as yet, option sellers haven't faced the kind of wipeout many faced in the fall of 2008. The ever-present steamroller has picked up speed, but the option sellers don't yet seem to feel even the heat from the steamroller's massive wheel.

In a sense, anyone who has not played the risky game of stock and bond investing in recent decades is considered foolish. For the steady march of both markets from generational lows in 1982 to generational highs today has made anyone who simply bought and held seem like a genius.

Lucky, however, is not the same as smart or well-trained. We can be reasonably assured that someone playing Rachmaninoff on the concert stage didn't simply get there by chance. My dentist whom I visited only last week didn't extract my painful tooth by luck. That kind of work takes training--at least it does if you don't want the patient to feel the drill cutting up the tooth or the roots coming out as parts of the tooth are removed! But investment mavens and gurus who are listened to by millions may be nothing more than lucky to have caught the greatest bull market in history. Let's see how they do on the way down.

Options are really insurance, insurance against bad outcomes. People have car insurance, home insurance and even life insurance. But almost no one takes out investment insurance. The whole idea seems absurd when financial markets are "known" to go only in one direction, up. It is the legacy of an age of perpetual growth that we hear that the market always comes back.

Except when it doesn't. Japan's last great bull market peaked on the final trading day of 1989 when the Nikkei Index reached 38,957. The index touched its post-boom low in March 2009 just above 7,000. Today, 25 years after the peak the Nikkei stands at 18,438. That's what a stock market did in a country in which economic growth essentially stopped for 25 years.

Of course, nothing like that could happen today. We believe that we have figured out how to have only prosperous years without any side effects from the mountains of debt we've built up worldwide and the massive financial imbalances between rich and poor and between nations. We've learned to ignore disturbances like the ones currently going on in Syria and Iraq, in the South China Sea, and in Ukraine. Days of reckoning are for other people, not for us. We live in the financial land of perpetual sun where nighttime has been engineered away.

And yet, I can see the first shadows of a long forgotten economic, financial and geopolitical night starting to creep into our daily lives and into the mood of the times. I can see more volatile days ahead.

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Full disclosure: I own no investments related to Yahoo, the S&P 500 Index, the Nikkei Index or crude oil. I do own other investments that would benefit from high volatility in the stock and commodities markets.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Sunday, October 04, 2015

Last week a new television series set amidst the North Dakota oil boom debuted. Blood & Oil tells the story of locals and newcomers striking it rich in The Bakken, an oil formation that has been heralded as containing more oil than Saudi Arabia--a wildly misleading* but understandably alluring slogan.

Based on the first episode we can conclude that this program is not actually a contemporary drama, but rather a period piece--specifically the period when North Dakota was booming from about, say, 2009 to sometime in mid-2014. And, therein lies the story. For Blood & Oil, above all, must be a tragedy of broken dreams if it is to live up to its realism credentials.

We must look beyond the fact that the show is shot in Utah to the substance of the series. When we do, we see the ever-present gambler's mentality that dominates the American mind. It did not go unnoticed that America was a land of plenty from the very beginning of European settlement. One of the first European explorers and founder of the first permanent English settlement, Capt. John Smith, observed:

And in diverse places that abundance, of fish lying so thick with their heads above the water [that] as for want of nets (our barge driving among them) we attempted to catch them with a frying pan, but we found it a bad instrument to catch fish with. Neither better fish, more plenty, nor more variety for small fish had any of us ever seen in any place so swimming in the water...

Even though Smith's gamble of starting over in the New World got off to a rough start for him and his fellow settlers at Jamestown, those who came after did find the promised riches of land, forests, minerals and animals unimagined in the Europe of that day.

So, the gamble paid off often enough to convince many others on the European side of the Atlantic and ultimately the Asian side of the Pacific to make the journey.

With the coming of the Bakken oil boom we modern Americans have recreated that journey. Those needing work and with only minimal skills or possessed of a restless spirit found a new life in North Dakota, a booming oil province, that--when it came to oil--seemed like the limitless wilderness first encountered by Europeans landing on the American continent.

In Blood & Oil Hap Briggs is a poor farmer's son who has built up large holdings of ranch land which, of course, have oil under them. He gets into the oil business himself and can't get enough of it.

Newcomer Billy LeFever breezes into town with his wife, Cody, who overhears the cellphone call of a landman discussing the leasing of drilling rights for a ranch, the name of which he repeats back to his boss. Cody tells Billy who then looks up the ranch in the county land records and realizes that the key to exploiting the oil there is a small piece of land that allows access.

Through machinations which appear to be illegal, Billy, who is broke, raises the necessary money to buy an option on that key piece of land. He then makes his first million offering the option to none other than Hap Briggs.

It is shrewdness (and willingness to skirt the law) which brings Billy riches. He's intelligent, but not overly so. His big idea for making money in North Dakota was to open laundromats--an idea that gets dashed in the first episode when a traffic accident sends him, his wife and his washing machines into a ravine. The machines are ruined, but Billy and Cody escape essentially unharmed.

What we are really watching, however, is two stories. The second story is one of a human culture that has never abandoned hunting and gathering--though we moderns imagine that we would never stoop to anything so prehistoric. And yet, hunting and gathering is essentially what we do to get all the minerals we use including oil. And by the way, oil isn't "produced" as we so reflexively say, it is merely extracted. Nature does all the work over millions of years, so humans don't have to--or at least don't have to do very much.

This is a lottery designed by nature and exploited by humans lucky enough to have oil on their land or enough capital at their disposal to lease the right parcels. But it's a lottery with a special twist. If you are Hap Briggs, you can invest all your new fortune in getting even more oil out of the ground to make your fortune bigger.

But when the bust comes, you can end up broke. Well, the bust has come to real-life North Dakota. In less that one year oil prices went from around $100 a barrel to under $50. As a result, we are seeing bankruptcies among the oil independents who were kings just a year ago. And, of course, all the other new businesses designed to serve the burgeoning North Dakota population will have their ranks thinned considerably--as the exodus begins among those now without work in the wake of a drastic reduction in drilling activity.

And with severely reduced drilling, North Dakota oil production is bound to go down since we already know that the rate of production decline for existing wells averages 40 percent in the first year.

So the question is: When Blood & Oil's storyline bumps up against the realities of 2015, what will become of Hap and Billy? And, what will become of the bustling fictitious city of Rock Springs? I think a city in decline with its heroes penniless or nearly so will be of little interest to American audiences. Such a turn of events in fictional North Dakota will likely mark the beginning of the end for the series.

Until that day viewers can follow actor Don Johnson of Miami Vice fame who has swapped the cool elegance of pastel summer wear for a cowboy outfit that seems to hang attractively on his character, Hap Briggs. When the time comes, Johnson will simply change clothes again and go on to a new role--just as many new North Dakotans are now doing to seek work elsewhere in the face of a bust that according to the oil industry wasn't supposed to happen for decades.

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*Saudi Arabia is purported to have 268 billion barrels of oil reserves. The Bakken and Three Forks formations (normally grouped together) are believed to hold 7.4 billion barrels. But these are not reserves which are known and readily producible, but so-called undiscovered, technically recoverable reserves that may not ever all be discovered. And what companies do find will almost certainly not be profitable to extract at current prices or perhaps even at much higher prices depending on the difficulty involved in extracting various deposits. Despite the seemingly large numbers, we must keep in mind that oil consumption today is also very large. The amount of undiscovered, technically recoverable oil reserves in The Bakken and Three Forks--even if all recovered--would last the United States only for a little over a year.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.